How to Turn $1,000 Into $1 Million

Foolish investing has nothing to do with getting rich quick. Sure, our market-beating Hidden Gems investment newsletter has had some quick and astounding successes: Middleby has quintupled in a little less than five years, for example, and the picks are beating the market by 24 percentage points overall.

And while we've given back a lot of our former gains due to recent volatility, the team is confident in its superior long-term prospects.

Around here, we adopt a "get rich slow" philosophy. Save money. Invest it regularly. Let the magic of compounding returns work for you. Our objective is to invest for the long term. I say "our objective" because we're all in this together, discussing prospects and finds alike on our discussion boards, identifying new small-cap stocks, and keeping track of developments at companies already discovered.

When examining a prospect for nomination, we look for companies with superior return on equity (ROE) -- something north of 15%, as is the case with great long-term investments Caterpillar (NYSE: CAT) (45%) and Starbucks (Nasdaq: SBUX) (19%). But we look for that characteristic among companies sporting much smaller market caps, because unlike Caterpillar and Starbucks, they can still grow five to 10 times in size. Here are a few examples.

We also look for free cash flow and net cash on a balance sheet that is not always reflected in a company's market capitalization (Netflix has more than $300 million in cash and no long-term debt, for example). We believe that companies sharing these traits can grow and beat the market over the years, just like Caterpillar and Starbucks.

In summary, we look for companies that combine business performance, cash-raising prowess, and substantial undervaluation to create the potential to double in value over three years.

Although this "two times in three years" formula will not always play out according to plan, we are confident that over time, we can soundly beat the market averages.

So what's achievable? Let's look at two scenarios for long-term growth. Call them the "Retire Comfortably" and "Set Your Grandkids Up for Life" scenarios.

Retire comfortably: $1 million in 45 yearsWe know that our recommendations are averaging impressive returns. But let's not get greedy, and let's not extrapolate for decades out into the future what has been a start beyond even the most optimistic expectations. What if we dial back our expectations and assume a still very aggressive annualized 16.6% return on our initial investment? In that case, $1,000 would take 54 months to double. And under that scenario, it would take approximately 540 months for $1,000 to double 10 times to reach $1 million -- or 45 years.

That should work out just about right for any Fools who have just graduated from college, have $1,000 to invest right now, and who'd like a chance at retiring comfortably on the proceeds around about age 65.

Set your grandkids up for life: $1 million in 75 yearsNow for scenario No. 2. There are plenty of market skeptics out there declaiming to all who will listen that the United States is entering a long-term secular bear market. The Oracle of Omaha says that we should be prepared to see overall stock market returns in the mid-single digits for the foreseeable future.

Ah, but we're not investing in index mutual funds. We're looking to buy just the good companies in the market -- rather than buying an index that incorporates the returns of a grab bag of companies, be they good investments, bad investments, or Enron common stock. Worst case, we're pretty confident that over the long term, we can at the very least match, and more likely beat, the market's historical performance by dint of hard work, diligent research, and patient perseverance. With the broad stock market averaging just above 10% annual returns across extended periods of time, that should assure us a reasonable chance of at least doubling our $1,000 within 7.5 years. Total time to $1 million: 75 years.

OK, admittedly, in 75 years' time, even you youngsters will be far into retirement age. While you'll likely get your million eventually, it may arrive too late to help pay for that vacation home in Florida. Why, in 75 years, even your kids may have retired. But what about your grandkids? And their kids? That $1 million could come in mighty handy to your Foolish dynasty.

As for you, well, there's still hope even under this scenario. Because the fact of the matter is that Fools don't invest $1,000 in one shot and then sit back and wait for the money to roll in -- whether that money is going to be 75, 45, or just 30 years in coming. Fools continue to save and keep investing. Regularly. Meaning that even at the market average, you could accumulate $1 million a lot sooner.

So, what are you waiting for? Time's marching on, and that money of yours isn't going to grow itself by remaining uninvested. If you aspire to be a millionaire, are willing to put forth the effort to get there, and have the patience necessary to stick with quality companies through good times and bad, Motley Fool Hidden Gems just might be for you. Click here to sign up for a free trial. You'll enjoy immediate access to all our back issues and past picks, with no obligation to subscribe.

This is an updated version of a Motley Fool take published on May 28, 2004.

Fool contributor Rich Smith does not own shares of any company mentioned. The Motley Fool owns shares of Starbucks. Sotheby's is a Hidden Gems recommendation. Starbucks is a Stock Advisor and Inside Value pick. Netflix is also a Stock Advisor selection. The Motley Fool has a disclosure policy.

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